Energy 109, Sudden decline in world oil prices

Good news and bad news. The good news is that world oil prices are declining in recent days, WTI for instance fell from $72 last week to only $67+ yesterday, so we can expect lower domestic oil prices around next week.

The bad news is that the $80/barrel Dubai crude threshold may not be reached anymore, so oil tax hikes part 2 by January 2019 under TRAIN will continue, another round of oil price hikes.

Either way, there will be more tax money for Dutertenomics. Higher world oil prices mean higher domestic prices, higher VAT collections. Lower world oil prices means the $80 threshold won't be reached, so part 2 of oil tax hike will proceed by January 2019. Whether higher VAT collections or higher excise tax collections from oil products, more money and jumping with joy for Dutertenomics.

Two main reasons for this. One, US oil production is ramping up fast, 10-11 M barrels per day (mbpd) seems easy. Hitting 12 mbpd may be reached this year or next year. Two, Saudi and Russia are scared of losing some of their market share if they continue the production cut, so they too have to raise their output. 

High oil prices can "kill cars" dream of the ecological socialists? 

Far out. That would mean more motorcycles, more tricycles, more e-bikes and more chaos on the roads. And that won't happen. People would cut their spending on expensive schools and meals, expensive houses, etc but they won't let go of their cars. The multiple ride system if one does not have a car, either owned or via ride-sharing/TNVS, is inconvenient. It means tricycle from house to nearest road with jeepney or bus, then jeep/bus, then MRT/LRT, then jeep again to destination. Reverse the process going home, about 6-8 rides a day. Inconvenience, susceptibility to thieves and maniacs.

---------------

See also:

Energy 105, When both world oil prices and domestic oil taxes are rising, January 14, 2018 

Energy 106, US oil output now 10+ mbpd, February 08, 2018 

Energy 107, Avoiding brownouts due to gensets, not solar battery, March 22, 2018 

Energy 108, On mandatory solar roof in California, May 20, 2018

Energy 105, When both world oil prices and domestic oil taxes are rising

Dutertenomics' tax-tax-tax implementation is off to bad timing. Raising oil taxes on already high and rising global oil prices -- $64 a barrel for WTI, nearly $70 for Brent -- is insensitive. But then again, even if the tax hike is P20 or P50/liter, the "money will go to the poor" naman daw is always a convenient, hollow, cavalier and opportunistic alibi.

"Diesel tax will increase from zero in 2017 to P2.50/liter in 2018, P4.50 in 2019, and P6.00 in 2020. Gasoline tax will increase from P4.35/liter in 2017 to P7 in 2018, P9 in 2019, and P10 in 2020. Coal tax will increase from P10/ton in 2017 to P50 in 2018, P100 in 2019, P150 in 2020." http://bworldonline.com/top-eight-energy-news-2017/

"the DoF is often quoted as saying that “two million richest Filipino families consume 50% of oil products in the country.” This is one of the reasons why they pushed for high tax hike for oil products.

There are about 25 million Filipino families now. The DoF refers to the richest 2 million families, so the other 23 million middle class and poorer class Filipinos consume the other 50% of oil products.... I think the DoF displayed dishonesty and deception in making that claim to further justify the high oil tax hikes." http://bworldonline.com/energy-favoritism-train/

Among the lousy supporters of "more taxes for oil please" and among the chief rah-rah cheerleaders of tax-tax-tax is the Action for Economic Reforms (AER). See for instance,

"Excise taxes on fuel products will be justifiably raised after 20 years of non-adjustment to inflation except for fuel that is primarily used for air travel, which can only be maximized by those who have more disposable income." http://bworldonline.com/public-interest-vested-interest/

Yes, poor farmers moving away from cow de carabao and using oil-guzzling tractors, moving away from manual harvest to oil-guzzling harvester-thresher combine machines should be penalized with higher oil taxes. Fisherfolks moving away from banka de sagwan and using motorboats to increase their fish harvest should be penalized with higher oil taxes. Great NGOs.

In one Senate comm. Hearing by Sen. Sonny Angara where I was also invited, the domestic shipping lines, airlines, bus lines, truckers, etc were saying the same thing -- if govt will push the high oil taxes, they will follow and obey the law but they will pass any price hike to the public. So even vegetables, fish, chicken, rice, etc consumed by the poor will experience price hikes. And DOF, AER, etc think this is fine and pro-poor daw.

LPG, from zero to P3/kilo. So the 11 kg LPG tank will experience P33/tank increase. The original DOF proposal was increase to P10/kilo or P110/tank. Even carinderias will also increase their food prices, or the less visible option -- serve smaller viand for the same price.

----------------

See also:

Energy 102, Germany's CDU/CSU and FDP rejecting the Greens' anti-coal agenda, October 31, 2017 

Energy 103, The proposed Jamaica coalition in Germany -- before the collapse, November 25, 2017 

Energy 104, Ric Barcelona on energy investment and subsidies, December 12, 2017

Energy Econ 4: Oil Prices and Taxes

* This is my article last Saturday in the online magazine,
http://www.thelobbyist.biz/perspectives/less-gorvernment/1345-oil-prices-and-taxes
---------

Oil Prices and Taxes

Local oil prices have significantly jumped the past few days by about P3 per liter. This reflected the upward movement of oil prices in the world market over the past few weeks. As usual, the left-leaning groups raised howl and criticized the oil companies for their “greed” and called on the government to have another round of tax hikes on oil or other products and services.

Last July 11, 2012, I attended the “Platts Forum on Oil, Coal and LNG” at Edsa Shangrila Hotel. Among the speakers there was Ms. Zenaida Monzada of the Department of Energy. Below are among the slide presentations she gave in the said forum.

Taxes that contribute to the higher retail prices of petroleum products are (a) excise tax, P4.35 per liter for gasoline, P3.67 per liter for jet fuel, P1.63 per liter for diesel, and (b) value added tax (VAT) 12 percent. This means that for the P54 per liter unleaded gasoline, about P10 of it goes to excise tax and VAT alone. Or the government is directly accountable for expensive oil by about P10 per liter. There are other indirect taxes of course, like corporate income tax, documentary stamp tax, real property tax, etc. of the oil companies, trucking and gas stations.

The lower chart shows that the Pesos per liter retail price has moved along with the world crude oil price, from 1984 onwards.

 Below, the same story is shown. From 1999 to June 2012, local gasoline and diesel prices have moved generally in steep with international crude and refined product prices. And world oil prices are dictated by the governments of the major oil exporting countries, both OPEC and non-OPEC member countries.

The conspiracy theory therefore, of oil companies dictating local oil prices to satisfy their greed is standing on a hollow ground.

Below, “prevailing prices” refer to early July 2012 prices. Prices across various oil dealers and retailers are generally similar, with minor price differential that can be attributed to other business costs like land lease or rent, and/or varying profit ratio.

The lower table shows comparative prices across major capital cities, converted into Pesos per liter. Philippine oil prices are not among the highest in the region. The most proximate explanation would be that those countries that have higher oil prices than us have higher taxes and fees, direct and indirect, that are slapped on oil products and oil producers and retailers.

The bottomline is that contrary to common public perception that the oil companies are the main instigator of oil price hikes, it is not. It is more due to the (a) governments of oil exporting countries like those in OPEN-member countries that set the price of crude oil, and (b) governments of net oil importing countries like the Philippines, for the various taxes and fees imposed both on the oil products and the companies that import, refine, transport and retail oil products.

Repeated calls to re-regulate if not nationalize the local oil industry are misguided and wrong. Instead of having more government involvement and intervention in local oil price setting, there should instead be lesser government taxes and involvement. The excise tax on oil products should in fact be abolished, instead of raising it as proposed by some sectors.
----------

See also:
Energy Econ 1: Coal Power, July 24, 2012
Energy Econ 2: Renewable Energy and High Electricity Prices, July 30, 2012
Energy Econ 3: Market Reforms in India's Electricity Sector, July 30, 2012

Tax Cut 13: Remove the Excise Tax on Oil Products

* This is my article today in the online magazine. After this paper, a brief exchange with fellow UPSE alumni, Gary Makasiar, in our SEAA ygroups.
----------

Excise Tax on Fuel Products is Wrong

http://www.thelobbyist.biz/perspectives/less-gorvernment/1326-excise-tax-on-fuel-products-is-wrong

An excise tax is a specific or fixed tax rate imposed by the government on certain “public bads” like alcohol and tobacco products because of their harmful effect on public health. The government also considers petroleum products and automobiles as among the “public bads” because of their supposed contribution to air pollution and the “destruction” of the planet.

The claim that human emission of CO2 via fossil fuel burning causes global warming is a debatable, if not rejected, theory. I have written a number of articles here in the past about climate alarmism.

Fuel products, those liquid-gas substances that help move our cars, buses, trucks, planes, motorcycles, pumpboats and some power plants, which allow us to produce and transport more goods and services, including bringing our kids to their schools, are not "public bad". We buy and import petroleum products because we need them. Without petrol products, our kids will be walking to school or riding bicycles, carabaos or horses. Without petrol products, vegetables from Benguet and other provinces will all be damaged and wilted when they reach Manila via carabao or horse transport, and there may be mass starvation in big urban areas like Metro Manila.

Currently, the Bureau of Internal Revenue (BIR) collects these excise tax rates on the following petroleum products, in Pesos per liter:

Regular gasoline, P4.80; unleaded gasoline, P4.35; aviation turbo, P3.67; diesel, P1.63; kerosene, P0.60; bunker fuel oil, P0.30; LPG, 0.

(source: BIR, National Internal Revenue Code, NIRC Online, http://www.bir.gov.ph/taxcode/2063.htm)

So there are two taxes that are slapped on fuel products, excise tax and value added tax (VAT). There used to be import tax too, but this has come down to zero in recent years.

From these excise tax rates, here is the government excise tax collections from 2010 to 2012, in Billion Pesos.

Excise tax on:	2010	2011	2012
Fuel and oils	9.83	9.41	10.11
Automobiles	2.42	2.65	2.91

Source: DBM, BESF 2012, Table C.2, http://www.dbm.gov.ph/

Since the volume of our national petroleum consumption is rising, not declining (see the big number of new cars and motorcycles, new buses and trucks, etc. that are added to our roads each year), the small or marginal increase in excise tax collection from 2010 to 2012 can mean one thing – that the extent of oil smuggling, or plain tax evasion, could be rising. Smuggled oil are not slapped with VAT and excise tax, the smugglers only pay off some BIR, BOC, local officials and police, to allow such smuggling and under declaration of sales to happen. The smugglers are then able to sell their products at a cheaper price, which attracts many buyers.

A friend who is a high official at the Department of Finance (DOF) said that excise taxes are not just slapped on so-called "public bads", but also on “products whose consumption must be regulated because of relative scarcity. We import petroleum products and it behooves us to be more prudent in the consumption of such products. That is part of the sumptuary nature of excise taxation.”

But wait, almost all commodities have "relative scarcity" -- computers, cell phones, cars, bicycles, rice, hamburer, beer, etc. So this rationale is not valid. The main reason why the government slaps excise tax on petroleum products is simply to get more money from the pockets of the people.

The cost of taxation, especially multiple and complicated taxation, is not just the actual amount being remitted to the government. There are three actually: (a) hiring auditors and/or lawyers to properly comply with various tax obligations, (b) bribes if necessary, to hasten and simplify tax assessment and payment, and (c) actual taxes paid.

Oil Politics 8: World's Highest Gas Prices

Bloomberg produced a list of the world's highest and cheapest gas prices by country two weeks ago. The paper did not give a breakdown of the general components of oil pricing, where I believe oil taxes by governments comprise more than half of the oil retail prices in those countries, especially those in the top 10.

I only copied the top 20 countries with the most expensive oil prices here.  Here's the story. http://www.bloomberg.com/slideshow/2012-05-12/highest-cheapest-gas-prices-by-country.html#slide1

Highest and Cheapest Gas Prices by Country
by Tom Randall - May 13, 2012

1. Norway.
Price per gallon of premium gasoline: $9.69
Most expensive gas ranking: #1
Pain at the pump ranking: #48

Norway is unusual in that it's the only major oil producer to have expensive gas. That's because, instead of subsidizing fuel at the pump, the country uses its oil profits for services such as offering free college education and saving for infrastructure improvements.

Norwegians pay the most of any country to fill up their tanks. They absorb these high prices with relative ease. The average daily income is $270. The share of a day's wages needed to buy a gallon of gas is 3.6 percent.

2. Denmark
Price per gallon of premium gasoline: $9.37
Most expensive gas ranking: #2
Pain at the pump ranking: #42

Denmark's high gas prices haven't drastically reduced the country's consumption. Danes still rank among the top quarter of the world's gas gluttons.

They can afford the higher price, with a comfortable pain-at-the-pump ranking of 42 out of 55. The average daily income is $178. The share of a day's wages needed to buy a gallon of gas is 5.3 percent.

3. Italy
Price per gallon of premium gasoline: $9.35
Most expensive gas ranking: #3 (tied with Netherlands)
Pain at the pump ranking: #29

Italy raised gas taxes 24 percent over the past year, triggering some of the highest prices in the world. It has been a shock to the home country of Ferrari and Lamborghini, where car ownership is one of the highest in the world. Auto sales fell more than 20 percent in the first quarter compared with a year earlier.

The austerity measures introduced by Prime Minister Mario Monti's government have pushed Italian gas prices up more than the EU average, with a 9.4 percent increase in 2012 alone. The average daily income in Italy is $103. The share of a day's wages needed to buy a gallon of gas is 9.1 percent.

4. Netherlands
Price per gallon of premium gasoline: $9.35
Most expensive gas ranking: #3 (tied with Italy)
Pain at the pump ranking: #37

The Netherlands has the most bicycles per capita in the world. Rows upon rows of them stand at train stations, museums and national parks. A vast infrastructure of bike paths and lanes, tunnels and traffic signals makes cycling easy to adopt.

The bike-loving Dutch feel more pain at the pump than their Scandinavian neighbors when they do drive. The average daily income in the Netherlands is $144. The share of a day's wages needed to buy a gallon of gas is 6.5 percent.

5. Greece
Price per gallon of premium gasoline: $9.23
Most expensive gas ranking: #5
Pain at the pump ranking: #23

The financial crisis in Greece has only exacerbated the high price of gas and its impact on consumers' wallets. Greece's gas prices are higher than the EU average, rising 11 percent this year.
The average Greek earns $75 a day. The share of a day's wages needed to buy a gallon of gas is 12 percent.

Oil Politics 7: Oil Price and Fare Hikes, Public Transpo Deregulation

With the recent spike in local oil price hikes recently as world oil prices were rising, there are growing voices and lobbying to demand higher fare for jeepneys, taxi and buses. While it is understandable that movement of fares (upward or downward) should follow movement in petroleum prices, I find it irrationale that politics should be used in determining when and how much, such fare movement should happen.

It is chaotic and politically complicated if government transport officials will always call for public hearing. Supporters and opponents to come, including those who ride on the issue so they will get good media coverage, which helps in their political work and lobbying, like those running in the forthcoming elections.

It is possible to detach politics from fare setting. Here are some mechanisms that may be worth considering by the various stakeholders.

1. Encourage corporate brands of jeepneys and taxis. Jeepney drivers and operators will become conscious of the corporate brand that they carry and passengers will remember the corporate brand of particular jeepney and taxi groups. Thus, some passengers will remember and avoid taking a particular jeepney or taxi corporation where drivers are discourteous and road maniacs that get into frequent accidents. And passengers will remember those jeepney or taxi corporations where drivers are courteous and friendly, give the exact change, and maintain their units in good running conditions. Competition among various jeepney and taxi corporations, not among single units, will give more comfort and safety to the passengers.

2. Deregulate fare-setting. Some jeepney or bus lines that do not maintain their units well will be forced to charge lower fares per kilometer while those jeepney or bus lines that give passengers comfortable and safe rides can charge higher fare. For instance, some bus lines can field buses with only 40 seats instead of the usual 60 seats, and charge minimum fare of P20 to P25 for the first 4 kms. Other bus lines can dispatch crammed buses (say 70 seats or more) and charge only P10 minimum fare for the first 4 kms. If fares are deregulated this way, some ugly and not regularly-maintained jeepneys will either slowly vanish from the road, or they will be forced to charge only P5 minimum fare for the first 4 kms., because passengers will have other options to ride the more comfortable jeepneys or buses even if they pay a higher fare.

3. Deregulate routing. Some jeepney or bus lines can dispatch their vehicles near the gates of big private villages in the suburbs (say Novaliches, Fairview, Antipolo, Las Pinas, Bulacan, etc.) to Makati, Ortigas, Eastwood, Manila, and so on. Then people will be encouraged to leave their cars in their house when they go to their offices or schools as they will take only one or two rides, not four or more rides.

At the moment, people who will not bring their cars from say, a village in Fairview, Quezon City to Makati, will take 4 rides or transfers. First, tricycle from their village gate to the main road. Second, jeepney or air-con van to MRT station. Third, MRT to Buendia or Ayala station, and fourth, jeepney or bus or taxi to Ayala or Buendia avenue. If one is wearing proper corporate attire and/or carrying a laptop and other important documents, it is very inconvenient and unsafe to be moving from tricycle to jeepney to the train and back to jeepney again. So even if there is heavy traffic and parking is expensive, people are forced to bring their cars to work or school, which exacerbates road congestion and parking nightmares in major commercial and business districts. The national government, through the LTFRB, and the local government created mini-monopolies on certain routes, like tricycle monopoly and jeepney monopoly.

Just encourage competition among bus or jeepney lines, also taxi lines or corporations, so that passengers will have plenty of options. If people will find that such options are safe, comfortable and economical, then they will not insist on bringing their cars everyday to their offices or their kids’ schools. There will be less traffic congestion, less air pollution, less parking problems, and more savings for the public.

And we will avoid politicized fare setting. No need for any public hearing, no need for any political and media lobbying, no need for any intervention by politicians and government transport officials.

Driver and operators of jeepneys, buses and taxi will be forced to maintain their units in good conditions, they will be forced to become more courteous to their passengers. Passengers need not even complain to the government if the service of a particular bus or jeepney line is lousy. Passengers will just stop riding that particular corporation and let their friends and acquaintances know about their bad experience. This kind of passenger boycott is worse than being reprimanded and penalized by any government transport agency.

Nearly two years ago, I wrote something about petroleum taxes.

VAT on Oil Products

July 10, 2008

As the price of petroleum products keep rising, the call for the lifting or abolition of value added tax (VAT) on these products gets louder. While the goal of such measure -- help reduce the price of oil products -- is laudable, the policy tool being proposed is wrong.

The single most important element of the "rule of law" concept is that the law applies to everyone and exempts no one. Any exemption to the rule immediately invalidates the "rule of law" and automatically becomes "rule of men". When applied to commodities, the law should apply to all sectors or products and exempt not a single sector or product.

In the crafting of the current VAT law that was enacted in 2005, a few products were exempted from coverage of VAT. These include agricultural and fishery products in their original forms, meaning raw vegetables, meat, fish, fruits, etc. Once they are processed, like dried mangoes or canned sardines, the processed product is covered by VAT.

The exemption of these products, and the attempts by many other producers that the products or services they produce be exempted from VAT, was both a proof and indicator that the 12 percent VAT rate was high, so that almost everyone wanted exemption from the tax law.

Now that it is a law, the spirit of "apply to everything and exempt nothing" should be retained. In this sense, I am not in favor of lifting or abolishing VAT on oil products. Or any other products and services.

And yet I also want the prices of those VAT-covered products and services be made lower, so how can it be done considering that VAT is one of those significant price inflators?

One of my favorite alternative policy options is the abolition of import tax (if it is not abolished yet) of all petroleum products, and abolition of excise tax on gasoline products. Current excise tax is about P5.60 per liter. These will help reduce the price of oil products.

Another policy option is a lower, flat income tax, especially on personal income tax. Any tax cut is equivalent to "salary increase". Such de facto "pay hike" especially for fixed income earners, will enable many people to better adapt to higher oil prices since it is a global phenomenon anyway, and other commodities with higher prices with higher take-home pay.

How "low" should the flat tax be to have a maximum positive result to the people? Zero income tax is the best. But the best is not always the most practical and feasible. A 10 percent flat income tax, to my mind, is the second-best alternative. At this rate, many people, from public school teachers and policemen to private sector ordinary employees to struggling small entrepreneurs, will benefit. And the State will still collect taxes at a much broader tax base as more people will be encouraged to pay income tax because the rate is lower and complying with it is simpler.
----------

See also:
Oil Politics 1: Bush vs. Chavez? March 12, 2007

Oil Politics 2: Oil prices and climate change, October 30, 2007

Oil Politics 3: $100/barrel Oil Price and Petroleum Taxes, November 13, 2007

Oil Politics 4: Is Expensive Oil Good for the World Economy?, March 18, 2008

Oil Politics 5: $150 a barrel and Government Public Transpo Monopoly, May 22, 2008

Oil Politics 6: Price Control, Political Opportunism and the Oil Speculators, November 17, 2009

Oil Politics 6: Price Control, Political Opportunism and the Oil Speculators

An article by Romy Bernardo on "Oil Price Controls" was uploaded at the "UP School of Economics Alumni Association" section of the UPSE website,
http://www.econ.upd.edu.ph/alumni/?p=488

If only the UPSE can take back the PhD degree it gave to President Gloria, the shameless economist. Nowhere in Econ 11 or Econ 102 and higher econ subjects was it ever justified that price control as an economic policy is good. It's bad and stupid, period. The short-term gains are very small compared to the long-term losses of low and uncertain investor confidence in the country. Investors would think twice or thrice, at putting up more gasoline stations in the country knowing that the government can declare oil price control anytime for whatever reason/s and for unspecified period of time, forcing the players to sell at a loss.

The President’s populist decision is of course echoed and supported by her other officials. In particular, the Secretaries of the Department of Energy, Department of Justice, Press Secretary and the Executive Secretary.

The State should be spending its time running after criminals, killers, rapists, kidnappers, carnappers, corrupt officials, etc. There are too many of them on the loose yet. Running after private enterprises which are in the business of selling various goods and services -- from medicines to hamburger to gasoline to hair cut, etc. -- is none of its business. Unless they are selling counterfeit or substandard medicines, hamburger with poison, gasoline with water, haircut with head injury, etc. If people think gasoline is expensive, then they should car pool and ride bicycles or walk. If the government thinks this is unfair, then government should also put a price control on fuel products (from Saudi, China, etc.) or refined products from Singapore, etc. Since it cannot do this, then it should to abolish taxes on petroleum.

But government is often a bunch of hypocrisy. Price control on the final products but no control on taxes, regulations and bureaucracies, not to mention corruption and robbery.

There is price for stupidity. Especially when the stupid one is the government. But at the end of the day, it is us consumers and taxpayers who get screwed. We are the ones who will suffer from oil rationing and shorter operating hours of gas stations. Government does not suffer, it always gets the first priority in any oil rationing.
.
But government stupidity should not go unpunished. The President’s opportunism should be punished. It is up to us how we should punish the administration, not only in the coming elections, but more so in writing the future history literatures of Philippine economic policies.

Of course there are plenty of jeepney drivers and operators, Mr. Jose Concepcion of Consumer and Oil Price Watch (COPW) and the hordes of other fuel consumers who favor oil price controls, even calling for government oil subsidy – from other taxpayers who economize on oil consumption. That's one danger of democracy. The demagogues and the mobs use coercion, State coercion, to enforce their will upon the less-noisy minority. If the majority think that oil prices are expensive, then they should economize on their trips, or they should ride bicycles and walk. But they should not coerce you and me to pay extra taxes so their oil consumption will be subsidized, if not provided free.

Socialists and populists like everything to be provided cheap, if not free. At the expense of everyone else, of course, especially the rich and middle class. For socialists and populists, to become rich and well off is a crime. Hence, they should be punished with high and multiple taxes.

Such thinking that persists up to this day, encouraged by coercion inherent in supposedly a democracy, is among the main reasons why economies stunt or do not grow to their potentials. And why policies driven by envy persist.

Meanwhile, I posted this last July 11, 2008.

Are Oil Speculators to Blame?

As world oil prices remain high, many people and analysts are blaming the "oil speculators" for the current "artificially high" oil prices.

I don't go along with these analysts. It's true that many oil speculators made lots of money here, along with rice speculators, gold speculators, real estate speculators, currency speculators, and several dozen other types of speculators, on the products or services that they are dealing with.

Speculation is like gambling, like stock trading, like observing and guessing whether your current girlfriend or boyfriend will be a good spouse someday or not. Hence, speculation is a perfectly rationale human behavior.

When some people think that there will be a war between Israel and Iran exactly 30 days from now, then they will sell their houses, their cars, their other properties and stocks, and buy as much oil futures they can at $140 or $145 a barrel, and hope to sell at $160 or $180 in 40 to 50 days.

But more people will speculate that such war possibility will happen in 9 years, 11 months and 29 days from now, there's no need to panic now, and will spend their money buying the houses, cars, stocks and other properties of those guys in the above group, at a bargain of course.

So who's the "better" speculator, the former or the later?
Any bet one picks, does not matter. And it's not only traders who speculate. Consumers also speculate. A person who thinks that oil will reach $200 within 10-12 months from now will sell all his current big cars at a bargain, and buy those small, fuel-efficient, or "green" cars even if they are expensive now. While a person who thinks the $200 oil will happen 3 or 4 years from now, will buy the big cars sold by that person at a bargain.

Speculation will happen, it is a perfectly rationale human behavior, so long as there is instability and unpredictability. And unpredictability will be with us for as long as we live, for as long as the sun will shine tomorrow and 4 or 5 billion years from now. Because change will always be with us. If we don't initiate change, our neighbors or other people will. And we will be forced to adjust or adapt to the changes initiated by other people.

So, are oil speculators to blame? NO.
---------

See also:
Oil Politics 1: Bush vs. Chavez? March 12, 2007

Oil Politics 2: Oil prices and climate change, October 30, 2007

Oil Politics 3: $100/barrel Oil Price and Petroleum Taxes, November 13, 2007

Oil Politics 4: Is Expensive Oil Good for the World Economy?, March 18, 2008

Oil Politics 5: $150 a barrel and Government Public Transpo Monopoly, May 22, 2008

Oil Politics 5: $150 a barrel and Government Public Transpo Monopoly

The Financial Times reported yesterday that oil may hit $150 a barrel by end-2008, "Shortage fears push oil futures near $140"
http://www.ft.com/cms/s/0/c2955660-2696-11dd-9c95-000077b07658.html .

I think it is not a far-out probability. Judging from traffic volume here in Metro Manila, seems that the volume of vehicles on regular working days at today's $120+ a barrel price were not different when oil prices were at $80 or $100 a barrel. Initial conclusion: oil demand is "inelastic" or not price-sensitive. Thus, it should be safe to assume that the volume of vehicles plying the streets and highways will be the same today as in the next few months even if oil prices will reach $140, $150, or more.

Why? Government over-regulation of public land transportation. Just when people want to leave their cars at home and take public transpo, more efficient and comfortable public land transpo are being discouraged from plying the roads due to government's difficult regulations, coupled with harassing and impounding so-called "illegal" or no-franchise public transpo, which reduces the volume of public land transpo in the cities, forcing many people to drive their cars.

In the US and many rich countries, it never fails to amaze me why the state and city governments cannot trust private enterprises to provide bus lines that compete among each other, because those local governments still monopolize buses! Because of government bus monopoly, the buses are few, they come far and several minutes from each other; the number of served routes are few, resulting in people waiting long for the buses. If you wait long and walk long distances, better ride a bicycle, or drive your car, even if oil prices keep on rising.

That is why governments are among the least credible institutions to "fight GHG emissions and climate change" because they are the main culprit why markets for public land transpo cannot function efficiently.

Meanwhile, I wrote this last week, May 13, 2008.

Peak Oil and Price Bubbles

World oil prices hit the $126/barrel mark last Friday, May 9. It seemed that last week, the commodity was rising by around $1/day on average.

There was one $200/barrel "peak oil" theory that I heard. Goldman Sachs predicted last week that the world will see that mark in 2 years. I feel that the world will see that mark earlier, less than 2 years, judging from the pace of current price hikes, so I think the "peak oil" theory of $200 a barrel is a joke. When the oil reaches $201 a barrel next year, it will further rise towards $300, and people will still be driving their cars -- even on weekends only to tour their families to visit other friends and relatives.

A friend, Cynthia D., noted that much of the latest increase in oil prices has been due to speculation. So many are just taking it for granted that the price of oil MUST continue increasing at the rate we have seen over the last two years. She thinks this has already passed the point which was the realistic value of oil and now we are in a bubble. And no matter what, bubbles eventually pop.

I think there is general recognition, although not a consensus yet, that current world oil prices are bubble prices and hence, will pop up someday. But the bigger bubble that helps prop oil prices is the US$. At Euro 1.60/US$ for instance, many people still think there is a lot of room for further depreciation of the US$ given the spend-and-spend, tax-and-borrow mentality of the US government, from federal to state to county/city levels, as well as the trade deficit. The more fiscal irresponsibility to be exhibited by the US federal and local governments and continuing trade deficit, the more room for $ depreciation.

So people who hold assets in US$ will feel "robbed" by inflation and currency depreciation. That is why many of them dump their $ and buy oil futures and other commodities (gold, copper, rice, coffee, corn, etc.) in order to protect their money.

Another problem is that while the oil price bubble continues, the political instabilities in some oil-producing countries (Nigeria, Venezuela, Iraq, Iran,...) also continue. So if you're a highly oil-dependent industry, better buy oil at bubble prices but you are guaranteed of delivery in the next 2 months at least, than wait for the bubble to pop up next week or next month and have no guaranteed delivery in the next 2 months at least.

The $200 "peak oil" theory is wrong. When you say "peak", no other price can top or exceed it. With the current trend in oil prices, bubble or no bubble, I think a "peak oil" should be in the vicinity of $1,500 a barrel, or perhaps $2,000, 40 to 50 years from now. This is partly due to the fact that no matter how high petroleum prices will be, many governments will not let go of oil taxes. Governments in general are parasitic: their tax revenue increases as the suffering by the public increases, and they couldn't care less.

Half a century from now, many oil reserves in the world would be depleted and the world will consume more renewable energy sources, and the "peak price" will no longer be exceeded, succeeding oil prices can only go down.
--------

See also:
Oil Politics 1: Bush vs. Chavez? March 12, 2007

Oil Politics 2: Oil prices and climate change, October 30, 2007

Oil Politics 3: $100/barrel Oil Price and Petroleum Taxes, November 13, 2007

Oil Politics 4: Is Expensive Oil Good for the World Economy?, March 18, 2008

Oil Politics 4: Is Expensive Oil Good for the World Economy?

One blogger asked, "could there be a danger for a bubble burst if oil prices dramatically and suddenly decreased given the current economic woes and enviromental concerns?"

I think world oil prices are heading north more than head towards the south. The trend is there: investors with lots of cash who are afraid to put their money in the banks because they don't know who will follow next to Bear Stearns, so they park their money in oil, gold, silver, other commodities. Here, they are assured of protection from high inflation and good returns, at least in the next few months.

Besides, with more globalization, more people around the world are working harder, they move more often, and use more petroleum or oil-substitutes more often.

So, is expensive oil good for the world economy? In a sense, Yes. The volume of cars and trucks on the roads, the boats and ships on the seas, and airplanes on the skies, will remain the same if not become plentier. But with higher oil prices, only more essential and more productive trips are made; the less essential and frivolous trips are postponed and substituted by online communications.

What about the poorer sectors and people of the world? Expensive oil will hurt them, true. But so will cheap oil in the form of "over-consumption" of the commodity, which leads to more traffic congestion, more pollution, more diseases, and less investments and R&D to fuel-efficient cars, "green" energy alternatives.

Meanwhile, the world is now getting accustomed to 3-digit oil prices. After the symbolic $100 a barrel has been reached about 2 months ago, the next "target" was the all-time high price of $103.7 a barrel, which was the current equivalent value of the $30+ touched in 1980 during the Iran hostage crisis. This week, the $110 has been touched, and as the trend continues, a $115 a barrel or higher, may not be too far.

The net gainers of these are the oil exporting countries (OPEC or non-OPEC members) of course, plus the speculators who make big profit margins with the continuing oil price spikes. They just collect higher revenues for the same volume of oil they sell and export. Prices of gold (has already touched the symbolic 4-digit level of $1,000 an ounce), silver, rice, wheat, many other commodities are rising anyway, so must oil.

If economies are generally competitive and there is easier entry and exit (near "contestable market" condition) for firms, high prices will attract new entrants and producers, either of the same goods or substitute goods. As oil prices continue to rise, the more profitable will be the “alternative energy” sectors, from windmills to solar to biofuels, etc.

On a related note, I posted this last February 28, 2008.

Inflation in oil exporting countries

As world oil prices tend to stabilize around the $100/barrel price, inflationary pressure building up in many oil-importing countries is understandable. But when the same pressure builds up in oil-exporting countries themselves, it's a little bit of news.

Well, not exactly. With so much money made from selling ever more expensive oil, inflation will surely happen in many oil-exporting countries -- if the supply of goods and services needed in those countries do not correspondingly increase. Remember that price increases only when the growth of supply of certain goods and/or services do not rise correspondingly with growth in demand.

More imports and trade liberalization, including increased inflow of workers and professionals from other countries who provide the services needed by the local people, will help tame inflationary pressures. For instance, if more Arab people will demand more modern health services, and if the number of healthcare facilities (clinics and hospitals, health laboratories, etc.) and health professionals do not expand, then those rich Arabs will flock to existing facilities and health professionals and crowd out their poorer countrymen and expats, resulting in high inflation in the health industry.
-------

See also:

Oil Politics 1: Bush vs. Chavez? March 12, 2007

Oil Politics 2: Oil prices and climate change, October 30, 2007

Oil Politics 3: $100/barrel Oil Price and Petroleum Taxes, November 13, 2007

Oil Politics 3: $100/barrel Oil Price and Petroleum Taxes

Below is my article published in Business Mirror(http://businessmirror.com.ph/) last Friday, November 9, 2007, page 10,Opinion section. Can't get the url for that day though.

Why a $100/barrel oil price and various petroleum taxes don’t mix

Bienvenido S. Oplas, Jr. *
November 7, 2007

Oil price, like the price of any other commodities and services, is driven mainly by the dynamics of supply and demand. High demand relative to supply means prices will go up. High supply relative to demand means prices will go down. And there are dozens of factors that determine both supply and demand. For instance, when millions of newly-riched Chinese and Indians, plus other people around the world buy new cars, then demand goes up. When oil producing-countries (OPEC or non-OPEC member-countries alike) pump more oil, and there are no supply disruptions (meaning no oil refinery or oil pipeline is blown up by bombs or knocked down by hurricanes), then supply goes up. But even if crude supply increases but oil pipelines are blasted, like the attack on pipelines in Yemen the other day, then supply can still go down, adding fears to oil consumers and traders, which further push prices up.

On Wednesday, world oil prices hit $97 a barrel, or just $3 away from the symbolic 3-digit level of $100 a barrel. This is partly due to the fact that despite continuing world oil price hikes in the past few months, world demand does not decline, staying at 85 million barrels a day on average.

Should oil prices finally reach $100 a barrel and stabilize there for say, one month, if not rise further, then it should be the right time for governments to cut petroleum taxes. In the Philippines there are at least 3 direct taxes slapped on petroleum products -- import tax (3%), excise tax (more than P5/liter for gasoline), and value-added tax (12%). Not included here are taxes slapped on companies that refine, distribute, and sell (wholesale and retail) oil.

The Philippine government says it is lukewarm to reduce or abolish the import duties. The DOE and DOF leadership say doing so will deprive the state of some P450 million/month in revenues while the people will only save around P0.23/liter. But what if a motorist, say a taxi driver, is consuming 60 liters a day or more, that’s a savings of around P14 a day. And there are more than 35,000 taxi units in Metro Manila alone. Another way of looking at this is that if the government will abolish the import duties, then the Filipino people will have P450 million/month of additional money in their pockets.

The continued imposition of excise tax on petroleum products is a callous decision. Excise tax is slapped on so-called “public bads” – petroleum (causes pollution), tobacco and alcohol products (can cause diseases to people). But is petroleum a “public bad”? People who do not want pollution from petroleum products should ride carabaos, horses or bicycles. A few people do this, but the majority can not. The use of petroleum to power vehicles that move people and their goods and services over far away places, is as necessary as food, clothing and shelter. Thus, abolition, or at least drastic reduction, of excise tax on petroleum products should be another measure that government should consider if it is honest in saying that it cares for the people.

The 12% VAT on oil products is possibly the only tax that can be retained. A zero import tax, zero excise tax, and 12% VAT, should be the best compromise between the public and the state to cushion an ever-increasing world oil prices without depleting the state’s coffers.
-------

I got 3 comments from 3 friends on my article above.

(1) From a friend working in Saudi Arabia, Lorrie Gallego. He wrote:

”You are correct Noy, Reduce taxes, reduce the number of congressmen, reduce the number of government employees!

”On supply and demand stats on oil, I remember between 1982 and 1985 Saudi Arabia was producing about 2.3 million barrels of oil per day. The price of crude at that time was ranging from 14 to 19 dollars per barrel. Now Saudi Arabia is producing around 9.5 million barrels per day and the price of oil is almost 100 dollars per BBL. In the last two years the world demand (or actual consumption) for oil remains around 84 million BBLs per day, but the price of oil went up from around $60 two years a go to near $100 now. Parang hindi proportionate ang price increase sa increase ng demand.

”Saudi Arabia's target production is 12 million barrels per day by 2009, and other middle east countries are drilling more oil wells too to increase their share of the oil supply. But I will predict that it will not take another decade before oil price will cross the 150 dollar per barrel mark.”

(2) From Ron:

“Noy, how about substituting petrol with nat gas or other 'green' alternatives? seems that phils do not consider this. jakarta has been using nat gas in some public transport, particularly their controversial busway system.”

(3) From Wyn:

“Then your point is to reduce if not eliminate big government taxes on petroleum. While this would be an immediate salve to our economic problems, i disagree. :) For the reason that fossil fuels are a fixed and diminishing resource. We can argue about when "the oil will run out", but run out it will.

Given that, i'd tend to support heavy penalization (thru taxes) of use of petroleum. Sure, it's *very* painful in the short run, but either we learn to curb our "oil appetite" gradually, or get a really rude shock sometime in the future.

Despite its immediate impact on our people, i believe that a stringent, penalizing energy regime is the way to go. It will teach us to pay attention to the (non-renewable) energy that we use and encourage development and use of renewable sources.”

Below are my reply to them.

(1) For Lorrie:

Thanks Lorrie for the additional information. Yes, $100 a barrel might be "expensive" for some people, especially the car owners. But other people who have never driven a car all their lives, they have been riding horses or bicycles only (like the millions of Chinese and Indians), now own a car, so what if the price of oil is $130 a barrel or more? The freedom of moving anywhere one wants to, along with his family and/or friends, can be priceless. Besides, they don't intend to use their car everyday, they can take the public transpo or their bicycles for their weekdays use. But on weekends or holidays or on special occasions, they need their car to tour their family, relatives or friends.

So it's not so much the price of oil as a result of supply-demand dynamics that's the issue. It's the hypocrisy of oil taxes, because the government that says it wants to help the price of oil "affordable" to the people, is the same institution that makes the commodity more expensive.

As I have argued in my paper, a 12% VAT on oil and leaving import tax and excise tax at zero should be fair to both the state and the Filipino consumers. But listen to what government officials will say -- they will not forego collections from import tax and excise tax, because they need the money to "help the people". So you can see the hypocrisy.

(2) To Ron:

Substitution is always a possibility under a free market environment. For instance, I contract a consulting work with A Consulting, Inc., I'm not happy with the outcome, so I go to (substitute you with) B Consulting, Inc., simple. Problem is no matter what substitute you make -- green substitute, brown substitute, black or pink substitute, if the mentality in government is "tax and tax and tax", the price of whatever substitute to petroleum or other "non-green" commodities will still go up much higher than the equilibrium price of that commodity if plain supply-demand dynamics was left alone.

(3) To Wyn:

My point in advocating the drastic cut, if not abolition, of import tax and excise tax on petroleum products, while retaining the value-added tax on the same, is because Malacanang, the DOE, DSWD, Congress, and every bleeding heart policy-makers and NGOs in this country say they care for the people who complain of high oil prices. So they think of various measures to "cushion" the impact of high world oil prices. In short, everyone in the above-mentioned category think of the price of oil, and not so much about oil depletion (or "peak oil") in the long-term.

So, if high oil prices is the main problem, as those guys have defined it, then one solution to bring down oil prices is those tax cuts on oil products. They can retain the excise tax on beer, wine, gin and brandy, cigarettes and tobacco, fine, but they should cut the excise tax on oil products.

I have anticipated earlier that some guys who trumpet too much about global warming and energy conservation would come forward and say that one solution to reduce global warming (and oil conservation) is the retention, if not the doubling, of current oil taxes. And I don't like that scenario. If governments want to encourage substitutes to petroleum products, those "green" energy, they don't have to trumpet cute slogans. They just abolish (or at least drastically reduce) all direct taxes and regulations to companies that develop wind energy, solar energy, nat-gas, geothermal, hydro, other "renewable" energy sources. But have we heard any government in the world brave enough to do this? So far, it's 100-100, or 587-587, nada, nothing.

* See also

Oil Politics 1: Bush vs. Chavez? March 12, 2007

Oil Politics 2: Oil prices and climate change, October 30, 2007